Pooled vs segregated assets refers to the investment strategy of a self managed superannuation fund (SMSF). A self managed superannuation fund is a specific type of super fund that has fewer than five members. Generally, all members of a SMSF are trustees of the SMSF, or directors of the SMSF’s corporate trustee. The trustees must formulate, review regularly and give effect to an investment strategy. The trustees of a SMSF can choose to run either a pooled or segregated investment strategy for members. There are advantages and disadvantages with both pooled and segregated funds. A pooled investment strategy can also be referred to as unsegregated.
Pooled vs Segregated Funds SMSF
The difference between pooled and segregated funds is that all of the assets of the SMSF are
attributed to all members under a pooled investment strategy, whereas each member or class of
member has specific assets supporting their balances under a segregated strategy.
For example, growth-orientated investments may be more suitable for members in accumulation
phase and defensive income-orientated assets may be more suitable for members in pension
phase.
Therefore, under a segregated investment strategy, the trustees would allocate growth assets to
accumulation members and income assets to retirement phase members.
Under a pooled investment strategy, all SMSF members would have their balance invested
identically.
Each balance would represent a portion of the SMSFs overall assets on a proportional basis.
Choosing unsegregated over segregated or vice-versa in neither right nor wrong.
It is simply a matter of preference for SMSF members and trustees.
The majority of SMSF trustees will run a pooled investment strategy.
The main reasons for this is because it is generally easier and cheaper from an administrative
perspective.
Also, in most cases, SMSF members are spouses of similar age, so the same investment strategy is
often suitable for both of them.
Pros and Cons of Pooled Investments SMSF
Detailed below are the advantages and disadvantages of running a pooled or unsegregated investment strategy within a SMSF.
Advantages of Pooled Assets in SMSF
Simplicity: The administration and accounting of pooled funds is much simpler than a segregated strategy.
Costs: Because the administration and accounting is usually easier, the costs are often lower too.
Purchasing Power: By pooling all member balances, the SMSF is able to invest in larger assets such as real property, or get direct access to wholesale investments.
Disadvantages of Pooled Assets in SMSF
Shared Strategy: By pooling assets, all members of the SMSF will need to have the same investment strategy as each other. This may not be suitable, particularly for members of varying ages, or different risk profiles and objectives.
Tax Inefficiency: Pooling assets does not allow for specific assets to be held in different tax-environments (accumulation vs pension phase), which may limit the tax-effectiveness of the strategy.
Pros and Cons of Segregated Investments SMSF
Detailed below are the advantages and disadvantages of running a segregated investment strategy within a SMSF.
Advantages of Segregated Assets in SMSF
Specific Strategy: Segregating assets allows for certain assets to be attributed to particular members or class of members, specific to their age, objectives and risk appetite.
Tax Efficiency: Segregating assets can allow, for example, growth-orientated assets to be held for accumulation members, limiting income tax within the SMSF, and income-producing assets for pension members, where no tax is payable on earnings.
Disadvantages of Pooled Assets in SMSF
Complexity: The administration and accounting of segregated funds is more complex than an unsegregated strategy.
Costs: Because the administration and accounting is usually more complex, the costs are often higher too.
Limited Investment Choice: Less capital available for bulk purchases under a segregated strategy could mean certain assets, such as real property and wholesale investments, might not be accessible.
Pooled vs Segregated Tax Method SMSF
The exempt current pension income (ECPI) is the income and capital gains within a SMSF that is
exempt for tax purposes.
There are two methods for calculating the ECPI.
These methods are the segregated method and the proportionate method.
ECPI Tax Segregated Method
The ECPI under the segregated method is calculated as all income derived from segregated current
pension assets.
Segregated current pension assets are assets supporting retirement phase income streams, other
than non-commutable transition to retirement income streams.
For financial years where there were segregated current pension assets for only part of the
year, the ECPI will be calculated on a pro-rata period basis.
ECPI Tax Proportionate Method
The proportionate method is used where the SMSF runs a pooled investment strategy.
In this instance, specific assets are not set aside to support a retirement income stream.
Therefore, an actuarial certificate is required to be obtained each year by the trustees to
determine the proportion of the SMSF assets that supports retirement income streams.
The ECPI will be determined by the exempt proportion of income based on the assets supporting
applicable retirement income streams, as per the actuarial certificate.
Choice of ECPI Calculation Method
A SMSF can choose to use which ECPI calculation method when:
A SMSF is not 100% in retirement phase when it has assets supporting at least one accumulation interest.
Disregarded small fund assets are where a member has a total superannuation balance in excess of $1.6 million immediately prior to the beginning of the year and the member is in receipt of a retirement phase income stream from the SMSF or another superannuation provider.
A SMSF must use the segregated ECPI calculation method when all of the SMSFs assets are used to support retirement income streams (i.e. 100% retirement phase) – other than if the SMSF has disregarded small fund assets.
A SMSF must use the proportionate ECPI calculation method when the SMSF has at least one retirement phase income stream and disregarded small fund assets.
SOURCE, All rights reserved to – Chris Strano, November 21, 2018, Pooled vs Segregated Assets SMSF, http://www.superguy.com.au/pooled-vs-segregated-assets-smsf/
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